Out to Pasture: Beef Demand Is the Key to Rebuilding

November 2, 2011 11:52 AM
 

SteveCornett circleThe beef checkoff folks have a challenge. Cattle prices are high but we’ve got to get them higher, and that will take lots of demand.

There’s little doubt the beef cowherd will be smaller on Jan. 1, 2012, than it was a year earlier. That has a lot of folks bulled up about the prospect of much higher cattle prices. The history of cattle cycles provides lots of evidence to support their enthusiasm.

I’m with them. I think. When the drought of 2011 forced people in the Southern Plains to liquidate their herds, many cows were moved not to slaughter but to greener homes. The demand for those cows tells me that we’re ready to turn the corner. Assuming that someday it rains enough in Texas and Oklahoma to green things up, you would expect producers there to get aggressive about replenishing their herds. That should put cows in short supply.

Which, in turn, should mean fewer heifers in the slaughter mix, which would reduce beef supply just as exports are growing. The rest should be the same as always: Higher prices mean less beef means higher prices mean less beef means…That’s how it works. (Until we get too much and start liquidating, as we have been for years, so that lower prices mean more beef means lower prices, etc.)

Anticipation for what’s ahead. I think I think like Steve Meyer and Len Steiner, who publish the CME Daily Livestock Report. Recently, they wrote: "The increase in feedlot placements has a number of implications for U.S. beef supplies and prices… By placing feeder cattle on feed at a younger age, and lower weight, producers will accelerate the time that it takes to bring a steer or heifer to market. Cattle will spend more weeks in feedlots and animals will be younger and lighter than normal when they go to market. Those supplying beef to the Japanese market will likely find more cattle available to meet export conditions.

"Putting cattle on feed early, bypassing the wheat grazing and/or pasture grazing, is a more expensive way of producing beef. This is one of the reasons why we think beef prices have nowhere to go but up in the coming months. Higher prices will be needed to bring a margin in the beef production business, otherwise we will see further reductions of the U.S. cattle herd."

Will demand allow it? That is well phrased, but my lingering doubt revolves around production costs and that "otherwise we will see further reductions" caveat. It is certain that we’ll need higher prices to slow herd reductions. But with cost of gain in the feedlot in the $1.20 range and fed cattle prices not far from that same point, how much of those higher prices can we count on?

If you have a $1.20 fed steer and a $1.20 cost of gain, how much can you even afford to pay for the calf? It would be $1.20, no matter the size of the calf. Calves are running higher than that now, so something has to give to justify higher prices.

I’d like that to be corn. But with the cheap dollar, low residual supplies and ethanol, I’m not very confident. So the "give" will probably have to come in the form of higher fed cattle prices or lower calf prices.

I’m as bullish as anybody. I hope we can push beef prices high enough to justify rebuilding herds and hold them. But there is this nagging doubt in the back of my mind that demand will allow it.
 

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Anonymous
11/10/2011 02:41 PM
 

  Steve, That demand is going to come from ground beef from the way the economy looks. The industry needs to refocus on cattle and marketing that produces acceptable high roughage finished cattle that end up as ground product. A finishing cost in the 90's changes the scenerio that you show. How do we get there?

 
 
Anonymous
11/10/2011 02:41 PM
 

  Steve, That demand is going to come from ground beef from the way the economy looks. The industry needs to refocus on cattle and marketing that produces acceptable high roughage finished cattle that end up as ground product. A finishing cost in the 90's changes the scenerio that you show. How do we get there?

 
 
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